Partners in businesses

19

ADMISSION OF A PARTNER

Kapil and Krish are running a partnership firm dealing in toys. They are

one of the most successful businessmen in the locality. They now decide

to start manufacturing toys that are electronically operated to diversify their

busmess. For this they need more capital and also technical expertise.

Mohit; their friend is an electronic engineer and has capital also. They have

persuaded him to join their firm. In case, he joins the partnership firm, this

will be a case of admission of a partner. As a result, he may need to bring

in capital and share of goodwill. In this lesson, you will learn about goodwill

and other ajustments at the time of admission of a partner. Mohit will bring

in capital and share of goodwill. Some changes in the value of some assets

and liabilities of the existing firm are need to bring them at their realistic

value, on his admission. There may be other issues involing finance on his

admission. All this need accounting treatment. In this lesson you will learn

accounting treatment and adjustments to be made on the admission of a

partner.

OBJECTIVES

After studying this lesson, you will be able to :

l state the meaning of admission of a partner;

l calculate new profit sharing ratio and sacrificing ratio;

l state the meaning and factors affecting goodwill;

l explain the methods of valuation of goodwill;

l describe accounting treatment of goodwill;

l explain the need for revaluation of assets and reassessment of liabilities;

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Admission of a Partner

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l illustrate the accounting treatment of changes arising from revaluation

of assets and reassessment of liabilities;

l describe accounting treatment of undistributed profits and reserves;

l explain the treatment of various adjustments in partners’ capitals ;

l prepare Revaluation Account, Partners’ Capital Accounts and balance

sheet of the reconstituted firm.

19.1 ADMISSION OF A PARTNER

Meaning, New Profit Sharing Ratio and Sacrificing Ratio

Meaning

An existing partnership firm may take up expansion/diversification of the

business. In that case it may need managerial help or additional capital. An

option before the partnership firm is to admit partner/partners, when a

partner is admitted to the existing partnership firm, it is called admission

of a partner.

According to the Partnership Act 1932, a person can be admitted into

partnership only with the consent of all the existing partners unless

otherwise agreed upon.

On admission of a new partner, the partnership firm is reconstituted with

a new agreement. For example, Rekha and Nitesh are partners sharing profit

in the ratio of 5:3. On April 1, 2006 they admitted Nitu as a new partner

with 1/4th share in the profit of the firm. In this case, with the admission

of Nitu as partner, the firm stands reconstituted.

On the admission of a new partner, the following adjustments become

necessary:

(i) Adjustment in profit sharing ratio;

(ii) Adjustment of Goodwill;

(iii) Adjustment for revaluation of assets and reassessment of liabilities;

(iv) Distribution of accumulated profits and reserves; and

(v) Adjustment of partners’ capitals.

Adjustment in Profit sharing Ratio

When a new partner is admitted he/she acquires his/her share in profit from

the existing partners. As a result, the profit sharing ratio in the new firm

is decided mutually between the existing partners and the new partner. The

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incoming partner acquires his/her share of future profits either incoming

from one or more existing partner. The existing partners sacrifice a share

of their profit in the favour of new partner, hence the calculation of new

profit sharing ratio becomes necessary.

Sacrificing Ratio

At the time of admission of a partner, existing partners have to surrender

some of their share in favour of the new partner. The ratio in which they

agree to sacrifice their share of profits in favour of incoming partner is called

sacrificing ratio. Some amount is paid to the existing partners for their

sacrifice. The amount of compensation is paid by the new partner to the

existing partner for acquiring the share of profit which they have surrendered

in the favour of the new partner.

Sacrificing Ratio is calculated as follows:

Sacrificing Ratio = Existing Ratio – New Ratio

Following cases may arise for the calculation of new profit sharing ratio

and sacrificing ratio:

(i) Only the new partner’s share is given

In this case, it is presumed that the existing partners continue to share the

remaining profit in the same ratio in which they were sharing before the

admission of the new partner. Then, existing partner’s new ratio is

calculated by dividing remaining share of the profit in their existing ratio.

Sacrificing ratio is calculated by deducting new ratio from the existing ratio.

Illustration 1

Deepak and Vivek are partners sharing profit in the ratio of 3 : 2. They admit

Ashu as a new partner for 1/5 share in profit. Calculate the new profit

sharing ratio and sacrificing ratio.

Solution:

Calculation of new profit sharing ratio:

Let total Profit = 1

New partner’s share = 1/5

Remaining share = 1 – 1/5 = 4/5

Deepak’s new share = 3/5 of 4/5 i.e. 12/25


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Vivek’s new share = 2/5 of 4/5 i.e. 8/25

Ashu’s Share = 1/5

The new profit sharing ratio of Deepak, Vivek and Ashu is :

= 12/25 : 8/25 : 1/5 = 12 : 8 : 5/25 = 12 : 8 : 5

So Deepak Sacrificed = 3/5 – 12/25 = 15 – 12/25 = 3/25

Vivek Sacrificed = 2/5 – 8/25 = 10 – 8/25 = 2/25

Sacrificing Ratio = 3 : 2

Sacrificing ratio of the existing partners is same as their existing ratio.

(ii) The new partner purchases his/her share of the profit from the

Existing partner in a particular ratio.

In this case : the new profit sharing ratio of the existing partners is to be

ascertained after deducting the sacrifice agreed from his share. It means the

incoming partner has purchased some share of profit in a particular ratio

from the existing partners.

Illustration 2

Neha and Parteek are partners, sharing profit in the ratio of 5 : 3. They admit

Nisha as a new partner for 1/6 share in profit. She acquires this share as

1/8 from Neha and 1/24 share from Parteek. Calculate the new profit sharing

ratio and sacrificing ratio.

Solution

Neha’s and Parteek existing ratio is 5 : 3

Neha’s new share = 5/8-1/8 = 4/8 or 12/24

Parteek’s new share = 3/8-1/24 = 8/24

Nisha’s share = 1/8+1/24 =4/24

The new profit sharing ratio of Neha, Parteek and Nisha is

12/24 : 8/24 : 4/24

= 12 : 8 : 4 = 3 : 2 : 1

(ii) Sacrifice ratio = 1/8 : 1/24 or 3 : 1

(iii) Existing partners surrender a particular portion of their share in

favour of a new partner.

In this case, sacrificied share of the each partner is to be ascertained. This

ascertained by multiplying the existing partner share in the ratio of their

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sacrifice. The share sacrificed by the existing partners should be deducted

from his existing share. Therefore, the new share of the existing partners

is determined. The share of the incoming partner is the sum of sacrifice by

the existing partners.

Illustration 3

Him and Raj shared profits in the ratio of 5:3. Jolly was admitted as a

partner. Him surrendered 1/5 of his share and Raj 1/3 of his share in favour

of Jolly. Calculate the new profit sharing ratio.

Solution :

Him surrenders 1/5 of his share, i.e., = 1/5 of 5/8 = 1/8

Raj surrenders 1/3 of his share, i.e., = 1/3 of 3/8 = 1/8

So, sacrificing ratio of Him and Raj is 1/8 : 1/8 or equal.

Him’s new share = 5/8 – 1/8 = 4/8

and Raj’s new share = 3/8 – 1/8 = 2/8

Jolly’s New share = 1/8 + 1/8 = 2/8

New profit sharing ratio of Him’s, Raj’s and Jolly’s is

= 4/8 : 2/8 : 2/8 or 4 : 2 : 2 or 2 : 1 : 1.

INTEXT QUESTIONS 19.1

I. Fill in the blanks with appropriate word/words :

(i) Sacrificing ratio is calculated by deducting .................. share of

profit from .................. share of profit of the existing partners.

(ii) On admission of a new partner, the partnership firm is ..................

(iii) The ratio in which partners surrender their profits is known as

..................

(iv) The new ratio of existing partners is calculated by dividing

remaining share of the profit in their ..................

II. If Tarun and Nisha are partners sharing profits in the ratio of 5:3. What

will be their sacrificing ratio if Rahul is admitted for 1/8 share of profit

in the firm?


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19.2 GOODWILL : MEANING, FACTORS AFFECTING

GOODWILL AND VALUATION

Meaning of Goodwill

Over a period of time, a business firm develops a good name and reputation

among the customers. This help the business earn some extra profits as

compared to a newly set up business. In accounting capitalised value of this

extra profit is known as goodwill. For example, your firm earns say Rs 1200

and the normal profit was expected from your firm Rs 700. The rate of return

is @ 10%. In this case goodwill is ascertained as under :

Step 1 : Excess profit = Actual profit – Desired normal profit

1200 – 700 = 500

Step 2 : Goodwill = 500100

10× = Rs 5000

In other words, goodwill is the value of the reputation of a firm in respect

of the profit earned in future over and above the normal profit. It may also

be defined as the present value of the capacity to earn future profits. This

means that a firm can be said to have goodwill only if it has capacity to

earn profit in future. A firm earning only normal profits like similar firms

cannot claim to have any goodwill.

Factors affecting the Goodwill

The factors affecting goodwill are as follows:

1. Location : If the firm is located at a central place, resulting in good

sale, the goodwill tends to be high.

2. Nature of Business : A firm that produces high value products or having

a stable demand is able to earn more profits and therefore has more

goodwill.

3. Efficient management : A well managed firm earns higher profit and

so the value of goodwill will also be high.

4. Quality : If a firm is known for the quality of its products the value

of goodwill will be high.

5. Market Situation : The monopoly condition to earn high profits which

leads to higher value of goodwill.

6. Special Advantages : The firm has special advantages like importing

licenses, long term contracts for supply of material, patents, trademarks,

etc. enjoy higher value of goodwill.

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Methods of valuation of Goodwill

The methods of valuation of goodwill are generally decided by the partners

among themselves while preparing partnership deed. The following are the

important methods of valuing the goodwill of a firm :

(i) Average Profit Method

(ii) Super Profit Method

(iii) Capitalisation Method

Let us learn about these methods.

1. Simple Average Profit Method : Under this method, average of the

profits of certain given years is calculated. The value of the goodwill

is calculated at an agreed number of years purchase of the average profit.

Thus the goodwill is calculated as follows :

Value of goodwill = Average Profit × Number of year of purchase

For example, the average profits of a firm of say 3 years and the goodwill

is to be calculated at 2 years purchase of the average profits works out

at Rs.25,000 and it is assumed that the same profits will be the value

of the goodwill will be Rs.50,000[Rs.25,000 × 2]. Thus the goodwill

is calculated as goodwill = average profits × Number of years purchase.

Illustration : 4

The profit for the last five years of a firm were as follows Year 2001

Rs. 1,20,000: Year 2002 Rs.1,50,000: Year 2003 Rs.1,70,000: Year 2004

Rs.1,90,000: Year 2005 Rs.2,00,000. Calculate goodwill of the firm on the

basis of 3 years purchases of 5 years average profits.

Solution :

Year Profit (Rs.)

2001 1,20,000

2002 1,50,000

2003 1,70,000

2004 1,90,000

2005 2,00,000

Total 8,30,000


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Average Profit = Total Profit/No. of Years

= Rs.8,30,000/5 = Rs.1,66,000

Goodwill = Average Profits × No. of years purchased

= Rs.1,66,000 × 3 = Rs.4,98,000

2. Super Profit Method : Super profits is the excess of actual profit over

the normal profits. If a new business earns certain percentage of the

capital employed, it is called ‘normal profit’. The value of the goodwill

is calculated at an agreed number of years purchase is multiplied by the

Super profit. Normal profit is that profit which is, earned by other

business unit of the same business. Normal profit will be calculated as

follows:

Normal profit = Capital employed × normal rate of return/100

Actual Profit : These are the profit earned during the year or it is also

taken as the average of the last few years profit.

Super Profit = Actual Profit – Normal Profit

For example, A firm earns profit of Rs.65,000 on a capital of Rs.4,80,000

and the normal rate of return in similar business is 10%. Then the normal

profit is Rs.48,000[10% of the Rs.4,80,000]. The actual profit is

Rs.65,000. Thus,

Super profit = Actual profit – Normal profit

= Rs.65,000 – Rs.48,000

= Rs.17,000

If value of Goodwill is calculated by 3 years’ purchase of super profit

then goodwill is equal to Rs.51,000[ Rs.17,000 × 3].

(b) Weighted average method : This method is a modified version of

average profit method. In this method each year profit is assigned a

weight i.e. 1, 2, 3, 4 etc. Thereafter each year profit is multiplied by

the weight and find product. The total of products is divided by the total

of weight. As a result we find the weighted average profit. After this

the value of goodwill is calculated to multiplied the weight average

profit into the agreed number of year’s purchase. Thus the goodwills

calculated as follows

Weighted average profit = Total product of profit

Total of weights

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Value of goodwill = Weighted average profit × number of year of purchase

(Note : This method is used when we observe that there is a tendency to

increase the annual profits. Latest year profit is assigned the highest weight.

Illustration : 5

The profit of firm for past years were as follow :

Profit Rs.

2002 80,000

2003 85,000

2004 90,000

2005 1,00,000

2006 1,10,000

The weight to be used are 1, 2, 3, 4, and 5 for the years from 2002- 2006.

Calculate the value of goodwill on the basis of two year’s purchase of

weighted average profit.

Solution

Year Profit Weight Products

2002 80,000 1 80,000

2003 85,000 2 170000

2004 90,000 3 270000

2005 1,00,000 4 400000

2006 1,10,000 5 550000

15 1470000

Weighted Average Profit = 14,70,000

15 = Rs 98,000

Goodwill = Rs 98000 × 2 = Rs 1,96,000

Illustration : 6

A firm earned the following net profits during the last 4 years


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Rs.

2003 90,000

2004 1,20,000

2005 1,60,000

2006 1,80,000

Capital employed in the firm is Rs.10,00,000. The normal rate of profit is

10%. Calculate the value of the goodwill on the basis of 4 year purchase.

Solution:

Total profit of 4 years = Rs. 90,000 + Rs. 1,20,000 + Rs. 1,60,000 + Rs.

1,80,000

= Rs.5,50,000

Average annual profit = Rs.5,50,000/4

= Rs.1,37,500

Normal Profit = Rs.10% of Rs.10,00,000 = Rs.10,00,000

× 10/ 100

= Rs.1,00,000

Super profit = Rs. 1,37,500 – Rs. 1,00,000

= Rs.37,500

Value of goodwill at = Rs. 37,500 × 4 = Rs. 1,50,000

4 years’ of purchase

3. Capitalisation Method : In this method, goodwill is the amount of

capital saved. Normally businessmen invest capital to operate business

activities, and earn profit with the efficient utilisation of capital. If the

business earns more profit by investing lesser amount of capital as

compared to other business, who earned same amount of profit with

more amount of capital, the saved amount is assumed to be goodwill.

Under this method, the Goodwill is calculated in two ways:

1. Capitalisation of Average profit

2. Capitalisation of Super profit

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1. Capitalisation of Average profit

In this method, the value of goodwill is assumed to be excess of the capital

value of average profit over the actual capital employed.

Following formula is applied for Calculation of capital employed:

Capital employed = Total assets – outsider liabilities

Following formula is applied for calculation of capitalised value of

profit:

Capitalised value of profit = Average Profit × 100/ Normal rate of profit

Goodwill = Capitalised value of profits – Capital cimployed

Illustration : 7

A firm earned average profit during the last few years is Rs.40,000 and the

normal rate of return in similar business is 10%. The total assets is

Rs.3,60,000 and outside liabilities is Rs.50,000. Calculate the value of

goodwill with the help of Capitalisation of Average profit method.

Solution:

Capital employed = Total assets - Outside liabilities

= Rs.3,60,000 - Rs.50,000

= Rs.3,10,000

Capitalised value of average profit = Average Profit × 100/ Normal rate of

profit

= Rs. 40,000 × 100/10

= Rs. 4,00,000

Goodwill = Capitalised value – Capital employed

= Rs. 4,00,000 – Rs. 3,10,000

= Rs. 90,000

Illustration : 8

The capital invested in a firm is Rs.4,60,000 and the rate of return in the

similar business is 12%. The firm earns the following profit in the last 4

years:

2003 Rs. 60,000 2005 Rs. 80,000

2004 Rs. 70,000 2006 Rs. 90,000

Calculate the value of goodwill by Capitalisation method.


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Solution

Total Profit = Rs.60,000 + Rs.70,000 + Rs.80,000 + Rs.90,000/4

Average Profit = Rs.3,00,000/4

= Rs.75,000

Capitalised Value = Average profit × 100/12

= Rs.75,000x100/12

= Rs.6,25,000

Goodwill = Capitalised value – Capital employed

= Rs.6,25,000 – Rs.4,60,000

= Rs.1,65,000

2. Capitalisation of Super profit

In this method, the value of goodwill is calculated on the basis of super

profit method. Following formula is applied for Calculation of capital

employed:

Goodwill = Super profit × 100/normal rate of profit

Illustration : 9

A firm earns a profit of Rs.26,000 and has invested capital amounting to

Rs.2,20,000. In the same business normal rate of earning profit is 10%.

Calculate the value of goodwill with the help of Capitalisation of super

profit method.

Solution

Actual profit = Rs. 26,000

Normal profit = Rs. 2,20,000 x 10/ 100 = Rs.22,000

Super Profit = Actual Profit – Normal Profit

= Rs. 26,000 – Rs.22,000

= Rs. 4,000

Goodwill = Super profit × 100/normal rate of profit

= Rs. 4,000 × 100/10

= Rs. 40,000

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I. Fill in the blanks with appropriate word/words :

(i) Goodwill is an .................. asset.

(ii) The amount of goodwill is generally brought in by ..................

Partner.

(iii) Super Profit = Actual Profit – ..................

(iv) The methods of calculating goodwill are .................. and ..................

(v) Capital employed = Total assets minus ..................

II. (a) From the following information, Calculate average profit : year

Year Profit (Rs) Loss (Rs)

2001 80,000

2002 90,000

2003 — 30,000

2004 1,10,000

Average Profit = Rs.

(b) Calculate value of goodwill at two year’s purchase of average

profit, ascertained in 2(a) above.

19.5 TREATMENT OF GOODWILL

The new partner acquires his/her share profit from the existing partners.

This will result in the reduction of the share of existing partners. Therefore,

he/she compensates the existing partners for the sacrifices. He/she

compensates them by making payment in cash or in kind. The payment is

equal to his/her share in the goodwill.

As per Accounting Standard 10(AS-10) that goodwill should be

recorded in the books only when some consideration in money has

been paid for it. Thus, if a new partner does not bring necessary

cash for goodwill, no goodwill account can be raised in the books.

He/she should pay for goodwill in addition to his/her contribution

for capital.

If, he/she does not pay for goodwill, then amount equal to his/her share of

goodwill will be deducted from the capital. The amount brought in by him/

her as goodwill or amount of goodwill deducted from his/her capital and


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divided between the existing partners in their sacrificing ratio. At the time

of admission of a new partner any goodwill appearing in the books, will

be written off in existing ratio among the existing partners.

There are different situations relating to treatment of goodwill at the time

of admission of a new partner. These are discussed as under:

1. When the amount of goodwill is paid privately by the new partner.

2. When the new partner brings his/her share of goodwill in cash.

3. When the new partner does not bring his/her share of goodwill in cash.

1. The amount of goodwill is paid privately by the new partner

If the amount of goodwill is paid by the new partner to the existing

partner privately, no journal entries are made in the books of the firm.

2. The new partner brings his/her share of goodwill in cash and the

amount of goodwill is retained in the Business:

When, the new partner brings his/her share of goodwill in cash. The

amount brought in by the new partner is transferred to the existing

partner in the sacrificing ratio. If there is any goodwill account in the

balance sheet of existing partner, it will be written off immediately in

existing ratio among the partners. The journal entries are as follows:

(i) The existing goodwill in the books of the firm will be written off

in existing profit ratio as;

Existing Partners Capital A/c Dr. [individually]

To Goodwill A/c

(Existing goodwill written off)

(ii) For bringing cash for Capital and goodwill

Cash/Bank A/c Dr.

To Goodwill A/c

To New partner’s Capital A/c

(Cash brought in for capital and goodwill)

(iii) For amount of goodwill transferred to existing partner capital

account:

Goodwill A/c Dr.

To Existing Partner’s Capital/current A/c [individually]

(The amount of goodwill credited to existing partner’s capitals in

sacrificing ratio)

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Illustration : 10

Tanaya and Sumit are partners in a firm sharing profit in the ratio 5 : 3.

They admitted Gauri as a new partner for 1/4th share in the profit. Gauri

brings Rs. 30,000 for her share of goodwill and Rs.1,20,000 for capital.

Make journal entries in the books of the firm after the admission of Gauri.

The new profit sharing ratio will be 2 : 1 : 1.

Solution :

Books of Tanaya, Sumit and Gauri

Date Particulars LF Debit Credit

Amount Amount

(Rs) (Rs)

1. Bank A/c Dr. 1,50,000

To Goodwill A/c 30,000

To Gauri’s Capital A/c 1,20,000

(cash brought by Gauri for her

share of goodwill and capital)

Goodwill A/c Dr.

To Tanaya’s Capital A/c 30,000

To Sumit’s Capital A/c 15,000

(Goodwill transferred to existing partners 15,000

capital account in their profit sharing ratio)

Working Note:

Calculation of sacrificing ratio [existing ratio – new ratio]

Partners Existing ratio New ratio Sacrifice Sacrificing ratio

Tanaya 5/8 2/4 5/8 – 2/4 = 1/8 Tanaya : Sumit

Sumit 3/8 1/4 3/8 – 1/4 = 1/8 1 : 1

The amount of goodwill is withdrawn by the existing partners:

(iv) Existing Partners Capital/current A/c Dr. [individually]

To Cash/Bank A/c

(The amount of goodwill withdrawn by the existing partners)

It is to be noted that sometimes partner’s withdraw only 50% or 25% amount

of goodwill. In such a case, entry will be made for the withdrawn amount

only.


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I1lustration : l1

In previous illustration, it is assumed that the full amount of goodwill is

withdrawn by the Tanaya and Sumit . Make journal entry in the books of

the firm.

Solution:

Books of Tanaya, Sumit and Gauri


amount amount

Rs Rs

Tanaya’s Capital A/c Dr. 15,000

Sumit’s Capital A/c Dr. 15,000

To Bank A/c 30,000

(Amount of Goodwill is withdrawn

by them)

3. New partner does not bring his/her share of goodwill in cash:

When the goodwill of the firm is calculated and the new partner is not able

to bring his/her share of goodwill in cash, goodwill will be adjusted through

new partner’s capital accounts. In this case new partner’s capital account

is debited for his/her share of goodwill and the existing partner’s capital

accounts are credited in their sacrificing ratio. The journal entry is as under:

New Partner’s Capital A/c Dr.

To Existing Partner’s Capital A/c [individually in sacrificing ratio]

(New partner’s share in goodwill credited to exisitng partner’s in sacrificing ratio)

Goodwill appears in the books of the firm and new partner does not

bring his/her share of goodwill in cash:

If the goodwill account appears in the books of the firm, and the new partner

is not able to bring goodwill in cash. In this case, the amount of goodwill

existing in the books is written off by debiting the capital account of existing

partners in their existing profit sharing ratio.

Illustration 12

Ashmita and Sahil are partners sharing profit in the ratio of 3 : 2. They agree

to admit Charu for 1/5 share in future profit. Charu brings Rs. 2,50,000 as

capital and enable to bring her share of goodwill in cash, the goodwill of

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the firm to be valued at Rs. 1,80,000. At the time of admission goodwill

existed in the books of the firm at Rs.80,000. Make necessary journal entries

in the books of the firm.

Solution:

Books of Ashmita, Sahil and Charu


amount amoun

Rs Rs

Bank A/c Dr. 2,50,000

To Charu’s Capital A/c 2,50,000

[Cash brought by Charu for her capital]

Ashmita’s Capital A/c Dr. 48,000

Sahil’s Capital A/c Dr. 32,000


[Goodwill written off before Charu’s

admission]

Charu’s Capital A/c Dr. 36,000

To Ashmita’s Capital A/c 21,600

To Sahil’s Capital A/c 14,400

[Existing partners capital a/c credited

for goodwill on Charu’s admission in

sacrificing ratio]

Working Note :

Ashmita and Sahil sacrifice their profit in favour of Charu in their existing

profit sharing ratio i.e. 3 : 2. Therefore, the sacrificing ratio is 3 : 2.

Value of Goodwill = Rs.1,80,000

Charu’s share in Profit = 1/5

Charu’s share of Goodwill = Rs. 1,80,000 × 1/5 = Rs. 36,000

New partner brings in only a part of his share of goodwill

When new partner is not able to bring the full amount of his/her share of

goodwill in cash and brings only a part of cash. In this case, the amount


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of goodwill brought by him is credited to goodwill account. At the time

of goodwill transferred to capital account of existing partner’s, new

partner’s capital account is debited with his unpaid share of goodwill

besides debiting goodwill account with the amount of goodwill is paid by

him. The journal entries is as

Bank A/c Dr.

To Goodwill A/c

[Part Amount of goodwill brought by new partnerI

Goodwill A/c Dr.

New Partner’s Capital A/c Dr.

To Existing Partner’s Capital A/c [individually in sacrificing ratio]

[Credit given to sacrificing partner by new partner’s in full share of goodwill]

Illustration 13

Tanu and Puneet are partners sharing profit in the ratio of 5 : 3. They admit

Tarun into the firm for 1/6 share in profit which he takes 1/ 18 from Tanu

and 2/ 18 from Puneet. Traun brings Rs.9,000 as goodwill out of his share

of Rs. 12,000. No goodwill account appears in the books of the firm. Make

necessary journal entries in the books of the firm.

Solution:

JOURNAL


Amount Amount

Rs Rs

Bank A/c Dr 9,000


[A part of his share of goodwill

brought in by Tarun]

Goodwill A/c Dr. 9,000

Tarun Capital A/c Dr. 3,000

To Tanu’s Capital A/c 4,000

To Puneet’s Capital A/c 8,000

[Goodwill credited to Tanu and Puneet

in their sacrificing ratio i.e 1 : 2]

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1. Fill in the blanks with appropriate word/words

(a) When Goodwill is paid privately, .................... will be made.

(b) If the new partner brings amount of goodwill, the amount of

goodwill brought by him is .................... to goodwill account.

(c) The amount brought in by the new partner is transferred to the

existing partner in the .................... ratio

(d) Goodwill appearing in the books of the firm is .................... at the

time of admission of a new partner.

(e) If the new partner is not able to bring his share of goodwill, The

new partner’s capital account is .................... for his share of

goodwill

2. Match the appropriate entry of Column B with that of Column A. by

writing the correct numbers of the column B in the space provided.

Column A Column B

1. Goodwill is paid privately I. Existing Partners Capital A/c

To Goodwill A/c

2. New partner is not able to II Goodwill A/c Dr.

bring cash for Goodwill. To Existing partner’s Capital A/c

3. At the time of admission III New Partner’s Capital A/c Dr

the goodwill appearing in To Existing Partner’s Capital A/c

the books is written off. To Existing Partner’s Capital A/c

4. At the time of admission IV No Entry

the amount of goodwill

brought by the new partner

is transferred to Capital

A/c existing partners capital

19.6 REVALUATION OF ASSETS AND LIABILITIES

On admission of a new partner, the firm stands reconstituted and consequently

the assets are revalued and liabilities are reassessed. It is necessary to show

the true position of the firm at the time of admission of a new partner. If

the values of the assets are raised, gain will increase the capital of the

existing partners. Similarly, any decrease in the value of assets, i.e. loss will

decrease the capital of the existing partners. For this purpose a‘Revaluation

Account’ is prepared. This account is credited with all increases in the value


Notes

159


ACCOUNTANCY

of assets and decrease in the value of liabilities. It is debited with decrease

on account of value of assets and increase in the value of liabilities. The

balance of this account shows a gain or loss on revaluation which is

transferred to the existing partner’s capital account in existing profit sharing

ratio The following journal entries made for this purpose are:

(i) For increase in the value of assets:

Asset A/c Dr. (individually)

To Revaluation A/c

(ii) For decrease in the value of Asset

Revaluation A/c Dr. (individually)

To Asset A/c

[Decrease in the value of assets]

(iii) For increase in the value of Liabilities:

Revaluation A/c Dr. (individually)

To Liabilities A/c

[Increase in the value of Liabilities]

(iv) For decrease in the value of Liabilities:

Liabilities A/c Dr.

To Revaluation A/c

[Decrease in the value of Liabilities]

(v) For unrecorded Assets

Asset A/c [unrecorded] Dr.

To Revaluation A/c

[Unrecorded asset recorded at actual value]

(vi) For unrecorded Liability :

Revaluation A/c Dr.

To Liability A/c [unrecorded]

[Unrecorded Liability recorded at actual value]

(vii) For transfer of gain on revaluation:

Revaluation A/c Dr.

To Existing Partner’s Capital/Current A/c

[Profit on revaluation transferred to capital account in existing ratio]

ACCOUNTANCY

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Notes



160

(viii)For transfer of loss on revaluation:

Existing Partner’s Capital/Current A/c Dr.

To Revaluation A/c

[Loss on revaluation transferred to capital account in existing ratio]

Proforma of Revaluation account is given as under:

Revaluation account

Dr. Cr.

Particulars Amount Particulars Amount

(Rs.) (Rs.)

Assets Assets

[decrease in value] [Increase in value]

Liabilities Liabilities

[increase in value] [Decrease in value]

Liabilities[unrecordcd] Assets [unrecorded]

Profit transferred to Loss transferred to

Capital A/c Capital A/c

[Individually in existing [Individually in existing

ratio] ratio]

Illustration 14

Karan and Tarun are partners sharing profit and losses in the ratio of

2 : 1. Their Balance Sheet was as follows:

Balance Sheet of Karan and Tarun as on December 31,2006

Liabilities Amount (Rs.) Assets Amount (Rs.)

Creditors 10,000 Cash in hand 7,000

Bills payable 7,000 Debtors 26,000

Building 20,000

Capitals: Investment 15,000

Karan 40,000 Machinery 13,000

Tarun 30,000 Stock 6,000

70,000

87,000 87,000


Notes

161


ACCOUNTANCY

Nikhil is admitted as a partner and assets are revalued and liabilities

reassessed as follows:

(i) Create a Provision for doubtful debt on debtors at Rs.800.

(ii) Building and investment are appreciated by 10%.

(iii) Machinery is deprecated at 5%

(iv) Creditors were overestimated by Rs.500.

Make journal entries and Prepare revaluation account before the admission

of Nikhil.

Solution

Journal


Amount Amount

(Rs.) (Rs.)

Revaluation A/c Dr. 800

To Provision for Doubtful Debts 800

[Provision made for doubtful debts]

Building A/c Dr.

Investment A/c Dr. 2,000

To Revaluation A/c 1,500

[Increase in the value of Building & 3,500

Investment]

Revaluation A/c Dr. 650

To Machinery A/c 650

[Decrease in the value of machinery]

Creditor A/c Dr. 500

To Revaluation A/c 500

[Value of creditors reduced by Rs.500]

Revaluation account

Dr. Cr.

Particulars Amount (Rs.) Particulars Amount (Rs.)

Provision for Building 2,000

Doubtful Debts 800 Investment 1,500

Machinery 650 Creditors 500

Profit transferred to

Karan’s Capital 1,700

Tarun’s Capital 850

2,550

4,000 4,000

ACCOUNTANCY

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Notes



162

19.7 ADJUSTMENTS OF RESERVES AND ACCUMULATED

PROFIT OR LOSSES

Any accumulated profit or reserve appearing in the balance sheet at the time

of admission of a new partner, is credited in the existing partner’s capital

account in existing profit sharing ratio. If there is any loss, the same will

be debited to the existing partner in the existing ratio. For this purpose the

following journal entries are made as:

(i) For distribution of undistributed profit and reserve.

Reserves A/c Dr

Profit & Loss A/c(Profit) Dr.

To Partner’s Capital A/c [individually]

[Reserves and Profit & Loss (Profit) transferred to

all partners capitals A/c in existing profit sharing ratio]

(ii) For distribution of loss

Partner’s Capital A/c Dr. [individually]

ToProfit and Loss A/c [Loss]

[Profit & Loss (loss) transferred to all partners

capitals A/c in existing profit sharing ratio]

Illustration 15

Rohit and Soniya are partners sharing profit in the ratio of 4:3. On lst April

2006 they admit Meena as as new partner for 1/4 shares in profits. On that

date the balance sheet of the firm shows a balance of Rs.70,000 in general

reserve and debit balance of Profit and Loss A/c of Rs.21,000. make the

necessary journal entries.

Solution

Journal


Amount Amount

(Rs.) (Rs.)

General Reserve Dr 70,000

To Rohit’s Capital A/c 40,000

To Soniya’s Capital A/c 30,000

[Transfer of general reserve to

the existing partner’s capital accounts]

Rohit’s Capital A/c Dr. 12,000

Soniya’s Capital A/c Dr. 9,000

To Profit & Loss A/c 21000

[transfer of accumulated Loss to

existing partner’s capital A/c]


Notes

163


ACCOUNTANCY

Illustration : l6

Bhanu and Etika are partners sharing profit and losses in the ratio of 3:2

respectively. Their Balance Sheet as on March 31, 2006 was as under:

Balance Sheet of Bhanu and Etika as on December 31,2006


(Rs.) (Rs.)


Capitals: Cash at Bank 23,000

Bhanu 70,000 Debtors 19,000

Etika 70,000 1,40,000 Buildings 65,000

Furniture 15,000

Machinery 13,000

Stock 30,000

1,68,000 1,68,000

On that date, they admit Deepak into partnership for 1/3 share in future

profit on the following terms:

(i) Furniture and stock are to be depreciated by 10%.

(ii) Building is appreciated by Rs.20,000.

(iii) 5% provision is to be created on Debtors for doubtful debts.

(iv) Deepak is to bring in Rs.50,000 as his capital and Rs.30,000 as

goodwill.

Make necessary ledger account and balance sheet of the new firm.

Solution :

Revaluation account

Dr. Cr.


(Rs.) (Rs.)

Provision for Doubtful 950 Building 20,000

Debts

Furniture 1,500

Stock 3,000


Bhanu’s Capital A/c 8,730

Etika’s Capital A/c 5,820 14,550

20,000 20,000

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Notes



164

Capital accountDr. Cr.

Particulars Bhanu Etika Deepak Particulars Bhanu Etika Deepak

(Rs) (Rs) (Rs) (Rs) (Rs) (Rs)

Balance c/d 96,730 87,820 50,000 Balance b/d 70,000 70,000 —

(closing) (closing)

Revaluation 8,730 5,820 —

(Profit)

Bank A/c — — 50,000

Goodwill A/c 18,000 12,000 —

96,730 87,820 50,000 96,730 87,820 50,000

Balance Sheet of Bhanu , Etika and Deepak

as on December 31, 2006

Liabilities Amount Assets Amount

(Rs.) (Rs.)


Capitals: Cash at Bank 1,03,000

Bhanu 96,730 Debtors 19,000

Etika 87,820 Less Provision 950 18,050

Deepak 50,000 2,34,550 Stock 27,000

Furniture 13,500

Machinery 13,000

Building 85,000

2,62,550 2,62,550

Illustration: 17

Ashu and Pankaj are partners sharing profit in the ratio of 3 : 2, their Balance

sheet on March 31, 2007 was as follows:

Balance Sheet of Ashu and Pankaj

as on March 31,2007


(Rs.) (Rs.)


Bills Payable 40,000 Cash at Bank 62,000

Salaries outstanding 5,000 Debtors 58,000

Profit & Loss 40,000 Stock 85,000

Capitals: Machinery 1,45,000

Ashu 1,50,000 Goodwill 38,000

Pankaj 1,30,000 2,80,000

4,03,000 4,03,000


Notes

165


ACCOUNTANCY

They admitted Gurdeep into partnership on the following terms on March

31, 2007.

(a) New profit sharing ratio is agreed as 3 : 2 : l.

(b) He will bring in Rs.1,00,000 as his shared capital and Rs.30,000 as

his share of goodwill.

(c) Machinery is appreciated by 10%

(d) Stock is valued at Rs. 87,000.

(e) Creditors are unrecorded to the extent of Rs.6,000.

(f) A provision for doubtful debts is to be created by 4% on debtors.

Prepare Revaluation account, Capital Accounts, Bank account and Balance

Sheet of the new firm after admission of Gurdeep.

Solution

Revaluation account

Dr. Cr.


(Rs.) (Rs.)

Provision for Doubtful Debts 2,320 Machinery 14,500

Creditors 6,000 Stock 2,000


Ashu’s Capital A/c 4,908

Pankaj’s Capital A/c 3,272 8,180

16,500 16,500

Capital account

Dr. Cr.

Particulars Ashu Pankaj GurdeepParticulars Ashu Pankaj Gurdeep


Goodwill A/c 22,800 15,200 — Balance b/d 1,50,000 1,30,000 —

Balance c/d 1,74,108 1,46,072 1,00,000 Profit & 24,000 16,000 —

Loss A/c

Revaluation 4,908 3,272

A/c (Profit)

Bank A/c — — 1,00,000

Goodwill A/c 18,000 12,000 —

1,96,908 1,61,272 50,000 1,96,908 1,61,272 1,00,000

ACCOUNTANCY

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Notes



166

Balance Sheet of Ashu Pankaj and Gurdeep

as on March 31,2007


(Rs.) (Rs.)


Bills Payable 40,000 Cash at Bank 1,92,000

Salaries outstanding 5,000 Debtors 58,000

Capitals: Less Provision (2,320)

Ashu 1,74,108 of doubtful debts 55,680

Pankaj 1,46,072 Stock 87,000

Gurdeep 1,00,000 4,20,180 Machinery 1,59,500

5,09,180 5,09,180

Bank account

Dr Cr


(Rs} (Rs)

Balance b/d 62,000 Balance c/d 1,92,000

Gurdeep’s Capital A/c 1,00,000

Goodwill A/c 30,000

1,92,000 1,92,000

Working Note:

Sacrificing Ratio = Existing Ratio – New Ratio

Partners Existing ratio New ratio sacrifice Sacrificing ratio

Ashu 3/5 3/6

18 15

30

3

30

−=

Ashu:Pankaj

Pankaj 2/5 2/612 10

30

2

30

−

= 3 : 2


Notes

167


ACCOUNTANCY

Illustration: 18

Himani and Harsha are partners in a firm. Their Balance Sheet on March

31, 2006 was as follows:

Balance Sheet of Himani and Harsha

as on March 31,2006


(Rs.) (Rs.)

Provision for Doubtful 3,000 Cash 20,000

Debts Sundry Debtors 90,000


Bills Payable 15,000 Machinery 41,000

Outstanding Expenses 2,000 Building 1,10,000

Capitals: Goodwill 40,000

Himani 1,70,000

Harsha 1,20,000 2,90,000

3,46,000 3,46,000

On April 1, 2006 they admitted Charu as a Partner on the following terms:

(i) Charu brings Rs.90,000 as her share of capital and she is unable to bring

any amount for goodwill.

(ii) Goodwill is valued at 2 Years purchase of the average profit of last

4 years. The Profit of last 4 years amounted to Rs.20,000: Rs.30,000:

Rs.30,000: Rs.40,000 Respectively.

(iii) New Profit sharing ratio between Himani’s, Harsha’s and Charu are

3 : 2 : 1.

(iv) Outstanding Expenses to be brought down to Rs.500.

(v) The provision for doubtful debts is to be increased upto 5% on Debtors.

(vi) Machinery is depreciated by 10% and Stock is valued at Rs.47,000.

Prepare Revaluation Account, Partners Capital account and opening Balance

sheet of the New firm.

ACCOUNTANCY

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Notes



168

Solution:

Revaluation account

Dr. Cr.


(Rs.) (Rs.)

Provision for Doubtful 1,500 Outstanding Expenses 1,500

Debts Stock 2,000

Machinery 4,100 Loss on revaluation

transferred to

Himani’s Capital A/c 1,050

Harsha’s Capital A/c 1,050 2,100

5,600 5,600

Capital account

Dr. Cr.

Particulars Himani Harsha Charu Particulars Himani Harsha Charu


Goodwill A/c 20,000 20,000 — Balance b/d 1,70,000 1,20,000 —

Revaluation A/c 1,050 1,050 Charu’s Capital — 10,000 —

A/c

(loss) Bank A/c — — 90,000

Harsha,s 10,000

Capital

Balance c/d 1,48,950 1,08,950 80,000

1,70,000 1,30,000 90,000 1,70,000 1,30,000 90,000

Balance Sheet of Himani,Harsha and Charu

as on March 31,2007


(Rs.) (Rs.)

Provision for Doubtful 4,500 Cash 70,000

Debts Bank 90,000

Sundry Debtors 90,000


Bills Payable 15,000 Machinery 36,900

Outstanding Expenses 500 Building 1,10,000

Capitals:

Himani 1,48,950

Harsha 1,08,950

Charu 80,000 2,90,000

3,93,900 3,93,900


Notes

169


ACCOUNTANCY

Working Note:

(i) Valuation of Goodwill:

Total Profit = Rs.20,000 + Rs.30,000 + Rs.30,000

+ Rs.40,000

Average Profit = Rs.1,20,000/4 = Rs.30,000

Goodwill = Rs.30,000 × 2 = Rs.60,000

Charu’s Share of Goodwill = Rs.60,000 × 1/6 = Rs.10,000

(ii) Sacrificing Ratio = Existing Ratio – New Ratio

Himani’s = 3 3

6

−

= 0

Harsha’s =

3 2

6

1

6

−=

Only Harsha sacrificed his share of profit.


Fill in the blanks with suitable word/words :

(i) Revaluation account is debited for an increase in the value of

.......................

(ii) Revaluation account is credited for an increase in the value of

.......................

(iii) Revaluation account is credited for an decrease in the value of

.......................

(iv) Revaluation account is debited for an decrease in the value of

.......................

(v) Profit on revaluation is transferred to the ....................... of the

partners’ capital account.

(vi) Reserve should be distributed amongst the existing partners in

.......................

(vii) Accumulated Losses are ....................... in the existing partner’s

capital account in existing profit sharing ratio.

ACCOUNTANCY

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Notes



170

19.8 ADJUSTMENT OF PARTNER’S CAPITAL

Sometime, at the time of admission, the partners’ agree that their capitals

be adjusted in proportion to their profit sharing ratio. For this purpose, the

capital accounts of the existing partners are prepared, making all adjustments,

on account of goodwill, general-reserve, revaluation of assets and resettlement

of liabilities. The actual capital so adjust will be compared with the amount

of capital that should be kept in the business after the admission of the new

partner. The excess if any, of adjusted actual capital over the proportionate

capital will either be withdrawn or transferred to current account and vice

versa.

The partners may decide to calculate the capitals which are to be maintained

in the new firm either on the basis of new Partner’s Capital and his profit

sharing ratio or on the basis of the existing partner’s capital account

balances.

1. Adjustment of existing partner’s capital on the basis of the capital

of the new partner:

If the capital of the new partner is given, the entire capital of the new firm

will be determined on the basis of the new partner’s capital and his profit

sharing ratio. Therefore the capital of other partners is ascertained by

dividing the total capital as per his profit sharing ratio.

If the existing capital of the partner after adjustment is in excess of his new

capital, the excess amount is withdrawn by partner or transferred to the

credit of his current account. If the existing capital of the partner is less

than his new capital, the partner brings the short amount or makes transfer

to the debit of his current account. The journal entries are made as under:

(i) when excess amount is withdrawn by the partner or transferred to

current account.

Existing Partner’s Capital A/c Dr.

To Bank A/c or Partner Current A/c

(Excess amount is withdrawn by the partner

or transferred to current account]

(ii) For bringing in the Deficit amount or Balance transferred to current

account.

Bank A/c or Partner Current A/c Dr.

To Existing Partner’s Capital A/c

(Bringing the Deficit amount or Balance

transferred to current account)


Notes

171


ACCOUNTANCY

Illustration 19

Asha and Boby are partners sharing profit in the ratio of 5:3 with capital

of Rs.80,000 and Rs.70,000 respectively. They admit a new partner Nitin.

The new profit sharing ratio of Asha, Boby and Nitin is 5:3:2 respectively.

Ntin brings Rs.40,000 as capital. The profit on revaluation of assets and

reassessment of liabilities is Rs.6,400. it is agreed that capitals of the

partner’s should be in the new profit sharing ratio. Calculate new capital

of each partner.

Solution:

Actual Capital of Asha and Boby

Asha Boby

(Rs.) (Rs.)

Balance in Capital A/c 80,000 70,000

Add Profit on Revaluation (5 : 3) 4,000 2,400

Capital after Adjustment 84,000 72,400

Calculation of new capital of the firm and existing partner’s capital

Nitin’s Share in the firm = 2/10

Nitin’s brings 40,000 for 2/10 Share

Total capital of the new firm in terms of Nitin’s capital

= 40,000 × 10/2

= Rs.2,00,000

Asha’s share in New Capital = 2,00,000 × 5/10 = Rs.1,00,000

Boby’s share in New Capital = 2,00,000 × 3/10 = Rs.60,000

On comparing Asha’s adjusted capital with the new capital we find that the

Asha brings Rs.16,000 [Rs.1,00,000 - Rs.84,000] or the amount may be

debited to her current account.

On comparing the Boby’s adjusted capital with the new capital, we find that

the Boby is to withdraw Rs. 12,400 [Rs.72,400 - Rs.60,000] or the amount

may be credited to his current account.

2. When the capital of the new partner is calculated in proportion to

the total capital of the new firm.

Sometimes the capital of the new partner is not given. He/she is required

to bring an amount proportionate to his/her share of profit. In such a case,

ACCOUNTANCY

MODULE - 4

Notes



172

new partner’s capital will be calculated on the basis of adjusted capital of

the existing partners.

For example, the capital account of Sumit and Anu show the balance after

all adjustments and revaluation are Rs.90,000 and Rs.60,000 respectively.

They admit Rohit as a new partner for 1/4 share in the profits. Rohit’s capital

is calculated as follows:

Total share = 1

Rohit’s share in the profit = 1/4

Remaining share = 1 – 1/4 = 3/4

3/4 share of profit combined capital of Sumit and Anu

= Rs.90,000+Rs.60,000 = Rs.1,50,000

Total Capital of the firm = Rs.1,50,000 × 4/3

= Rs.2,00,000

Rohit’s capital for 1/4 share of profits = Rs.2,00,000 × 1/4 = Rs.50,000

Rohit brings in Rs.50,000 as his Capital

Illustration : 20

Manoj and Hema are partner sharing profit and losses in the ratio of

7 : 3. On March 31,2006, their Balance Sheet was as follows:

Balance Sheet of Manoj and Hema

as on March 31,2006


(Rs.) (Rs.)

Capital : Bank 12,000

Manoj 88,00 Sundry Debtors 45,000

Hema 64,00 1,52,000 Bills Receivable 30,000

Sundry creditors 32,000 Stock 35,000

Bills Payable 38,000 Investment 13,000

Reserve 18,000 Machinery 40,000

Building 45,000

Goodwill 20,000

2,40,000 2,40,000

They admit Tarun into partnership on the following terms:

(i) Stock is revalued at Rs.40,000.


Notes

173


ACCOUNTANCY

(ii) Building, Machinery and Investment are depreciated by 12%.

(iii) Prepaid Insurance is Rs. 1,000.

(iv) Tarun brings Rs.40,000 as his capital and Rs. 12,000 for goodwill for

1/6 share of profit of the firm.

(v) Capital of the partners shall be proportionate to their profit sharing

ratio. Adjustment of Capitals to be made by Cash.

Prepare Revaluation Account, Partners’ Capital Account , Cash Account and

Balance Sheet of the new firm.

Solution:

Revaluation account

Dr. Cr.


(Rs.) (Rs.)

Building 5,400 Stock 5,000

Machinery 4,800 Prepaid Insurance 1,000

Investment 1,560 Loss transferred to

Manoj’s Capital 4,032

Hema’s Capital 1,728 5,760

11,760 11,760

Capital account

Dr. Cr.

Particulars Manoj Hema Tarun Particulars Manoj Hema Tarun


Goodwill 14,000 6,000 — Balance b/d 88,000 64,000 —

Revaluation 4,032 1,728 — General 12,600 5,400 —

A/c (loss) Reserve

(loss) Goodwill A/c 8,400 3,600

Bank A/c — 5,272 — Bank A/c — — 40,000

Balance c/d 1,40,000 60,000 40,000 Bank A/c 49,032 — —

(Profit)

1,58,032 73,000 90,000 1,58,032 73,000 90,000

ACCOUNTANCY

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Notes



174

Balance Sheet of Manoj, Hema and Tarun

as on March 31, 2006


(Rs.) (Rs.)

Bills Payable 38,000 Bank 1,07,760

Sundry creditors 32,000 Bills Receivable 30,000

Capitals A/c: Sundry Debtors 45,000

Manoj 1,40,000 Stock 40,000

Hema 60,000 Investment 11,440

Tarun 40,000 2,40,000 Prepaid Insurance 1,000

Machinery 35,200

Building 39,600

3,10,000 3,10,000

Bank account

Dr Cr


(Rs) (Rs)

Balance b/d 12,000 Hema’s Capital A/c 5,272

Manoj’s Capital A/c 49,032 Balance c/d 1,07,760

Goodwill A/c 12,000

Tarun’s Capital A/c 40,000

1,13,032 1,13,032

Working Note:

(a) Calculation of New profit Sharing Ratio:

Total Profit = 1

Tarun gets = 1/6

Remaining Profit = 1 – 1/6 = 5/6 share by Manoj and Hema in their

existing profit sharing ratio.

Manoj’s new share = 5/6 × 7/10 = 7/12

Hema’s new shares = 5/6 × 3/10 = 3/12

New profit sharing ratio of Manoj, Hema and Tarun

= 7/12 : 3/12 : 1/6 or 7 : 3 : 2.


Notes

175


ACCOUNTANCY

(b) Adjustment of Capital:

Tarun brought capital for 1/6 share = Rs.40,000

Total Capital of the firm = Rs. 40,000 × 6/1 = Rs.2,40,000

Manoj’s Capital = Rs. 2,40,000 × 7/12 = Rs. 1,40,000

Hema’s Capital = Rs. 2,40,000 × 3/12 = Rs.60,000

Tarun’s Capital = Rs. 2,40,000 × 2/12 = Rs.40,000


Tanu and Anu are partner’s sharing profit in the ratio 3:2. They admit Sumit

as a new partner of 1/5 share in the profit and brings Rs.50,000 for his

capital. The Capital of Tanu and Anu after all the adjustments are Rs.95,000

and 90,000 respectively. Calculate the total capital of the new firm and

capital of the each partner on the basis of the new partner’s capital.

WHAT YOU HAVE LEARNT

Admission of a partner – Meaning

When a partner so admitted to the existing partnership firm, it is called

admission of a partner.

On the admission of a new partner, the following adjustments become

necessary:

(i) Adjustment in profit sharing ratio;

(ii) Adjustment of Goodwill;

(iii) Adjustment for revaluation of assets and reassessment of liabilities;

(iv) Distribution of accumulated profits and reserves; and

(v) Adjustment of partners’ capitals.

Adjustment in Profit sharing Ratio

When new partner is admitted he/she acquires his/her share in profit from

the existing partners. As a result, the profit sharing ratio in the new firm

is decided mutually between the existing partners and the new partner.

Sacrificing Ratio

At the time of admission of an incoming partner, existing partners have to

surrender some of their share in favour of the new partner. The ratio in which

they surrender their profits is known as sacrifice ratio.

ACCOUNTANCY

MODULE - 4

Notes



176

Meaning of Goodwill:

A established firm develops wide business connections. This helps the firm

to earn more profits as compared to a new firm. The monetary value of such

advantage is known as “Goodwill”.

Methods of valuation of Goodwill

(i) Average Profit Method

(ii) Super Profit Method

(iii) Capitalisation Method

Revaluation of assets and liabilities

On admission of a new partner, the firm is reconstituted and the assets are

revalued and liabilities are reassessed. It is necessary to show the true

position of the firm at the time of admission of a new partner.

Adjustments of reserves and accumulated profit or losses

Any accumulated profit or reserve appearing in the balance sheet at the time

of admission of a new partner, are credited in the existing partner’s capital

account in existing profit sharing ratio. If there is any loss, the same will

be debited to the existing partner in the existing ratio.

Adjustment of partner’s capital

Sometime, at the time of admission, the partners’ agreed that their capitals

are adjusted to the proportionate to their profit sharing ratio. The partners

may decide to calculate the capitals which are to be maintained in the new

firm either on the basis of new Partner’s Capital and his profit sharing ratio

or on the basis of the existing partner’s capital accounts.

TERMINAL QUESTIONS

1. State the meaning of Sacrificing Ratio.

2. State the meaning of Goodwill.

3. Explain the methods of valuation of goodwill.

4. Explain ‘Revaluation Account’. Why assets are liabilities are revalued

at the time of admission of a new partner?


Notes

177


ACCOUNTANCY

5. Explain the treatment of accumulated profit or losses and Reserves at

the time of admission of a new partner.

6. Explain the calculation of the proportionate capital of the new partner

in case of admission of a partner.

7. A and B are partners sharing profit in the ratio of 5 : 3 is admitted to

the partnership for 1/4 share of future profit . Calculate the new profit

sharing ratio and sacrificing ratio.

8. Rohit and Meena are partners sharing and losses in the ratio of 7 : 3.

Rohit surrenders 1/7 of his share and Meena surrenders 1/3 of his share

in favour of Teena,a new partner. Calculate the new profit sharing ratio.

9. A firm has earned Rs.3,00,000 as average profit for the last few year.

Normal rate of return in the class of business is 15%. Find out goodwill

according to Capitalisation of Super profit, if the value of net assets

amounted to Rs. 16,00,000.

10. The following is the Balance Sheet of Tarun and Ashima sharing profit

and losses in the ratio of 2 : 1.


(Rs.) (Rs.)

Capitals: Cash 12,000

Tarun 50,000 Sundry Debtors 60,000

Ashima 40,000 90,000 Stock 12,000

Sundry creditors 20,000 Furniture 6,000

Building 20,000

1,10,000 1,10,000

They agreed to admit Sunita into partnership on the following terms:

(i) Sunita tp pay Rs.9,000 as Goodwill.

(ii) Sunita bring Rs. 11,000 as her Capital for 1/4 share of profit in

the business.

(iii) Building and furniture to be depreciated at 5%. Stock is reduced

by Rs. 1,600 and Bad Debt Reserve Rs.1,300 to be provided for.

Prepare necessary ledge account and balance sheet after admission.

11. A and B are partner in a firm sharing profit in the ratio 2 : 1. C is admitted

into the firm with 1/4 share in profits. He will bring in Rs.60,000 as

capital and capital of A and B are to be adjusted in the profit sharing

ratio. The Balance sheet of A and B as on March 31, 2006 was as under:

ACCOUNTANCY

MODULE - 4

Notes



178

Balance Sheet of A and B as on March 31,2006


(Rs.) (Rs.)

Sundry creditors 16,000 Cash in Hand 4,000

Bills Payable 8,000 Cash at Bank 20,000

General Reserve 12,000 Sundry Debtors 16,000

Capitals: Stock 20,000

A 1,00,000 Furniture 10,000

B 64,000 1,64, 000 Machinery 50,000

Building 80,000

2,00,000 2,00,000

Other terms of agreement are as under:

l. C will bring in Rs.24,000 as his share of Goodwill.

2. Building was valued at Rs.90,000 and Machinery at Rs.46,000

3. A provision for bad debts is to be created @ 6% on Debtors.

4. The capital account of A and B are to be adjusted through cash.

Prepare necessary account and Balance Sheet after C’s admission.

ANSWERS TO INTEXT QUESTIONS

Intext Questions 19.1

I. (i) New, Existing (ii) reconstituted (iii) sacrifice ratio

(iv) existing ratio

II. Sacrificing ratio 5 : 3.


I. (i) intangible (ii) incoming (iii) Normal Profit

(iv) Average profit, super profit and Capitalisation

(v) Outsider liabilities

II. (a) Rs. 62,500 (b) Rs.1,25,000


I. (i) no entry (ii) credited (iii) sacrificing

(iv) debited (v) debited

II. 1. IV 2. III 3. I 4. II.


Notes

179


ACCOUNTANCY


(i) Liabilities, (ii) Assets, (iii) Liabilities,

(iv) Assets, (v) Credit side. (vi) Existing ratio

(vi) debited


Total Capital of the new firm Rs.2,50,000

Capital of Tanu’s Rs.1,20,000, capital of Anu’s Rs.80,000

Answers to Practical Terminal Questions

7. New profit sharing ratio 15 : 9 : 8, Sacrificing ratio 5 : 3.

8. New profit sharing ratio 3 : 1 : 1

9. Goodwill Rs. 4,00,000

10. Loss on Revaluation Rs. 4,200, Total of Balance Sheet Rs. 1,25,800

11. Profit on Revaluation Rs. 5,040, Capital of A Rs. 1,20,000, B & C

Rs.60,000 each, Balance sheet Total Rs. 2,64,000

Activity : Talk to the owners of five such business organisations

which are doing good business and have built up good reputation

in the market. Write against each firm the factor that have

contributed to its goodwill

Name of the firm Nature of Business Factors contributing to

the goodwill of the firm

Partners in businesses

Technology

existing ratio new ratio

existing partners new

favour of new partner

new firm

new partners share

partner meaning

partner accountancy

partner partnership